Internal Control

Internal Control is a very broadly defined process designed to provide reasonable assurance of the achievement of objectives regarding three main categories. They are: Reliability of Financial Reporting, Effectiveness and Efficiency of Operations and finally Compliance with applicable laws and regulations.

To be effective, an internal control system needs to set the moral tone of the organization, influencing the control consciousness of the organization. Setting the tone also examines the integrity exhibited by both the managers and employees.

Management should set organizational objectives that are reasonable and obtainable given the nature of the organizations business. Management also needs to analyze both the internal and external potential for violations. Finally, Management needs to develop and implement a strategy to manage the risk that has been identified.

Management also sets in place policies and procedures that enforce management’s directives. However, without the monitoring of the policies and procedures, their usefulness will quickly fade.

Organizations also need to define what information is to be communicated and to whom that information can be communicated to. This includes defining document retention policies.

In a smaller organization, internal control is made difficult because often there are not enough people to truly segregate responsibilities. Larger organizations are better equipped to have a solid control system. Regardless the size of the organization, there are some fundamental components that any organization can adopt:
· Establish a code of Ethics for the organization
· Careful Screening of job applicants
· Proper assignment of authority and responsibility
· Effective disciplinary measures

© Strategic Financial Leadership, Inc. 2009